Globalization of production, manufacturing employment, and income inequality in developing nations

Abstract

Theories of income distribution in developing nations suggest contrasting expectations regarding how employment industrialization affects income inequality. However, past studies have not considered how the globalization of production shapes the relationship between manufacturing share of employment and income inequality in developing countries. Relatedly, social scientists argue that the globalization of production has exacerbated inequality, but past cross-national research focused on the Global South has yielded inconsistent findings regarding the trade-inequality link. In this article, I draw on the political economy literature focused on the distributional effects of global value chains (GVCs) in the developing world and argue that the rise of globalized production in recent decades has undermined the egalitarian characteristics of the manufacturing sector. While the sector was characterized by higher wages for low-skilled workers and a compressed wage distribution, I argue that rising competition, declining bargaining power of workers, and skill-biased industrial upgrading associated with GVCs has stretched wage distributions and heightened the skill premium in the manufacturing sector. Empirical analyses of cross-national panel data from broad samples of developing nations between 1970 and 2014 suggest that global integration has diminished the equalizing effect of manufacturing employment. I conclude by discussing the prospects for inclusive development in this era of globalization as well as the theoretical and policy implications of these findings.

Keywords: Development; Economic globalization; Income inequality; Industrialization.